Millions of credit, debit and prepaid cards have been issued to consumers, large and small businesses. Today, most cards primary utility is to pay for goods or services by the card holder on line by providing required information on a web site and the like (Card Not Present) or by swiping a card at a point-of-sale (POS) device or through a Near Field Communication (NFC) device and the like (Card Present). Conversely the merchant (Biller, e-commerce site, a store; or the like) when accepting a card provides facilities such as a POS device, a secure and encrypted website that is capable of accepting payment, etc. Traditional business owners or individuals who are paid by customers for goods or services rendered have an increasing desire to accept payment from customer credit, debit cards, or electronic checks, and accepting such payments online or through mobile devices as well as from point-of-sale (POS) terminals. Accepting payments from credit and debit cards (as well as electronic checks) allows a business owner or individual to sell goods and services to a large market and improve cash flow, and provides buyers (e.g. customers) of those goods and services a secure, convenient, and efficient way to make payments.
Businesses owners who would like to accept electronic payments typically have two concerns. First, business owners have to establish a merchant account that allows the business owner to accept payments from customer credit and debit cards or electronic checks. Second, business owners have to connect the merchant account to their website or mobile application so that if a customer makes a credit, debit card or electronic check payments using the business' website or mobile application, the payment is processed by debiting the payor (e.g. customer) account and depositing the payment to the payee (e.g. business') account.
Conventional credit card or debit card transactions between a business and a customer involve up to four additional parties. A first party is a payment network such as Visa®, Mastercard®, American Express®, STAR® etc. that processes and settles payments between multiple different business and customers. A second party is a card issuer which is typically a financial institution that is a member of at least one payment network. Such a financial institution issues the card (e.g. credit or debit) for a government entity, consumer or a business. The third and fourth parties are a financial institution member of a specific network sponsor and a merchant processor and its agents. Together they perform the role of an acquirer. That is, an acquirer is one or more entities the accepts and processes card payments. Thus, a sponsor may be a financial institution that is a member of at least one payment network which sponsors a merchant processor to use the payment network and is financially responsible in case of loss or default (with respect to accepted card payments) to the payment network on behalf of the organization it sponsors The reason for such sponsorship is because payment networks only accept a financial institution to be their members so that can be financially responsible for the card payments. A merchant processor has a contractual relationship with each individual business, has and provides electronic transaction processing capability to process the card payment transactions for that business. In some cases a financial institution entity may assume the roles of an issuer, acquirer, sponsor and a merchant processor or a combination thereof such as JP Morgan Chase or US Bank presently. Some networks such as American Express have predominantly only two parties: (1) the payment network which performs the role of both an issuer and acquirer; and (2) a merchant processor and its agents. American Express, traditionally did not have financial institution issuing its cards, although recently it is changing its business practices such that it is allowing financial institution issuers to participate in its network.
The costs associated with establishing a merchant account and taking online card payments can be significant for a business owner. For example, most merchant acquirers or their affiliates charge an application fee and a monthly fee for a merchant account, and further take a percentage of each payment processed. Further, many small business owners are not able to obtain a merchant account with an acquirer (i.e. sponsor and merchant processor) because many business owners do not meet acquirer requirements of having sufficient operating capital to cover any losses that might happen due to fraud, chargebacks, refunds and other risks. The efforts associated with taking online payments are also significant for business owners. Industry regulations require that parties who are involved in capturing, storing, or processing card transactions adhere to security rules which includes Payment Card Industry (PCI) standards. Many small business owners do not have the knowledge, skills or the resources to generate and operate a website where customers can make card payments that comply with such security standards.
An alternative to establishing a merchant account with a financial institution and linking it to a website is to establish an account with an alternative service provider such as PayPal or Google Checkout. These alternative service providers act as agents of the merchant processors in most cases and offer small business owners a way to generate a website where they can sell goods and services and receive card payments, combined with a payment processing service that does not require the business to obtain its own merchant account from an acquirer (i.e. sponsor and merchant processor). Instead, the alternative service provider works with an existing acquire as its agent to accept card payments from a customer to a general merchant account in most cases although not always
The benefit of using an alternative service provider is a business does not have to obtain a merchant account from an acquirer. However, the disadvantages of using an alternative service provider include high processing fees and that the merchants do not receive funds in a timely manner. Instead, the merchant has to wait for the alternative service provider to transfer funds from the provider's merchant account to a merchant's bank account, and may have to wait up to several days before they have access to the funds.